IU.eu: Are there other differences between a typical sovereign CDS and a corporate CDS?

Klein: Apart from the currency issue, which is perhaps the main difference, there are differences in the definition of the credit event which triggers payment under the contract. For a sovereign CDS there's no bankruptcy clause, and the credit event is typically defined as failure to pay either principal or interest, moratorium, and repudiation.

Also, most sovereign CDS typically trade as funded instruments, in other words as credit-linked notes, where the investor pays upfront. A typical corporate CDS is unfunded. You have more counterparty risk in an unfunded swap so, other things being equal, you'd expect the CDS spread to be lower than in a funded instrument.

So, although I've seen direct comparisons made between the levels of our counterparty risk index ("CRI), which is an average of the CDS spreads of 14 leading banks, and the GRI, it's important to remember that you're not comparing like with like exactly.

IU.eu: What's the liquidity like in sovereign CDS, compared to that in corporate CDS?

Klein: Since November, the website of the DTCC has given a weekly update of trading volumes and open interest for all the names in the GRI. This shows that the number of contracts traded for the GRI members is typically lower than for a typical liquid corporate CDS, but the notional size of the government CDS contracts is higher. All the members of the GRI index have pretty good trading liquidity.

After the Lehman default and the near-default of AIG, and the introduction of the Troubled Assets Relief Program TARP in the US, there was a big push to improve the transparency of the credit derivatives market, and the DTCC's publication of this data should be seen as part of this trend.

IU.eu: How do ensure accuracy of pricing for the index?

Klein: Our primary source of price data is CMA Datavision, which is widely regarded as probably the leading independent source of credit derivatives market information.

IU.eu: Are you expecting tradeable products - say, an ETF - to be based on the GRI?

Klein: That's certainly one of our goals, both for the GRI and for the other credit indices which we calculate.

IU.eu: What other government CDS indices are you planning?

Klein: The GRI is quite concentrated geographically and there's a lot of interest in, and trading liquidity in other government CDS markets, so we're looking at whether we can add other regional indices. There's nothing concrete planned for launch yet.

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